Wage inequality in the global economy
Item statusRestricted Access
Embargo end date29/11/2020
This thesis is devoted to understanding the driving forces of growing wage inequality across and within countries. My research aims to empirically assess and to find theoretical justifications for two features of wage inequality: First, wage inequality among workers who are similar in education, age, and other characteristics, i.e. ’residual wage inequality’ and second, the growing wage gap between workers of different skill groups, i.e. the skill-premium. Chapter 1. Wage Inequality and the Role of Multinational Firms: Evidence from German Linked Employer-Employee Data This chapter contributes to our understanding of how firms’ diverse international activities affect wage inequality between observationally identical workers. Using German linked employer-employee data, this study investigates the wage premium of exporters and multinational enterprises, controlling for observable and unobservable firm and worker heterogeneity. In doing so, this study is among the first to (1) jointly estimate the exporter and the multinational wage premium and (2) to further distinguish between wage premia of multinational firms that are foreign owned (inward FDI) and domestically owned (outward FDI). I find evidence that the wage premium of multinational firms is larger than the exporter premium. Moreover, my findings suggest that the so called ’exporter wage premium’, as found by previous studies, is in fact driven by multinationals that engage in exporting activity. Another important contribution of the paper is to document the skill and task structure of wage premia and employment. My findings exhibit a clear hierarchy of firms’ international activities with regard to wage premia for different skill groups and the average observed and unobserved workforce ability, where MNEs can be ranked highest. This observed pattern between the ranking of wages and the skills required, suggests worker-firm-type complementary. Chapter 2. Heterogeneous Globalisation, Labour Market Rigidities and Wage Inequality This chapter proposes a theoretical model to study the implications for wage inequality of two distinct forms of globalisation, namely trade and foreign direct investment. The model exhibits a clear hierarchy of firms’ international activities with regard to firm size, average workforce ability and wage premia, where firms engaging in foreign direct investment can be ranked highest. The mechanism is based on a model with ex-ante homogeneous workers, heterogeneous firms and search and matching frictions within a two-country two-sector trade model with monopolistic competition. By including foreign direct investment by multinational firms, this paper provides novel insights into the interaction between firm specific factors and firms’ international activities in determining wage inequality and in particular, the multinational wage premium. Furthermore, the comparative statics exercise in this paper shows that the interdependence between labour market rigidities and firms’ mode of foreign market entry, implies that changes in a country’s labour market institution changes the distribution of exporters and multinational firms within and across countries. Chapter 3. Accounting for Skill Premia across Countries and Time This chapter uses the structure of a two-sector two-factor model to attribute changes in the skill premium across countries to three potential sources: (i) changes in the relative abundance of skilled workers, (ii) technological change and (iii) market size effects due to external economies of scale. I employ the development and growth accounting methodology as analytic tool to assess the relative importance of each one of these channels in explaining changes in the skill premium across countries and time. My findings add to the growing evidence that there is hardly any association between changes in the relative supply of skills and the observed evolution of the skill-premium. Furthermore, I show that the measure of the importance of market size effects governs the strength of the relationship between technological change and the skill-premium. Moreover, for strong enough economies of scale, an increase in the relative supply of skills increases the the skill premium. Importantly, this finding points out that the scale of the economy may be an important factor in shaping developments of the skill premium, independent of the specific features of technological change.